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The captioned appeal is filed by the Revenue and the CO is filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)- 1 Ahmedabad, [Ld. CIT (A) in short] dated 26/03/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-inafter referred to as "the Act") dated 16/12/2016. The assessee has filed Cross Objection in the Revenue’s appeals bearing ITA no. 1507/AHD/2018 for the Assessment Year 2014-2015.
First, we takeup the Revenue’s appeal bearing ITA No. 1507/AHD/2018.
The Revenue has raised the following grounds of appeal:
1. That the ld.CIT(A) erred in alw and on facts in deleting the addi ion of Rs.6,77,67,630/- made on account of disallowance of interest in respect of interest free a vances.
2. That the ld.CIT(A) erred in law and on facts in deleting the addition of rs.7,05,498/- made on account of Capital Expenditure (Information Technology Expenses).
3. That the ld.CIT(A) erred in law and on facts in res ricting t e addition to Rs.2,610/- from Rs.13,514 made u/s.14A r.w Rule 8D.
4. That the ld.CIT(A) erred in law and o facts in deleting the addition of Rs.15,53,966 made on account of income corresponding to TDS and not applying the provisions of sec.199 read with Rule 37BA.
5. The appellant craves to leave, to amend and/or to alter any ground or add a new ground which may be necessary.
2. The first issue raised by he Revenue is that the ''Ld. CIT (A)'' erred in deleting addition made by the AO for Rs. 6,77,67,630/- only on account of diversion of interest bearing funds
3. The facts in brief are that the assessee in the present case is a limited company and engaged in the business of development & sale of plots of land and commercial complexes. The assessee in the year under consideration has shown advances to certain parties for the purchase of land/development rights amounting to Rs. 56,47,30,250/- only. The assessee has not charged any interest from the parties to whom advances were given. However, the assessee during the assessment proceeding justified to the AO by submitting that it has given advances in the course of its business activities.
3.1 The assessee without prejudice to the above also contended that its own interest free funds exceeds the amount of advances. Therefore there cannot be any disallowance of any interest on account of diversion of interest bearing funds.
3.2 However, the AO disregarded the contention of the assessee by holding that the assessee has diverted its interest bearing funds. Accordingly, the AO worked out the amount of proportionate interest expenses amounting to Rs.6,77,67,630/- being 12% of the amount of advances diverted for non-commercial activities and added the same to the total income of the assessee.
4. Aggrieved assessee preferred an appeal to the ''Ld.CIT (A)'' who deleted the addition made by the AO by observing, inter alia, as under:
“It is also observed that as stated herein above appellant has sufficient interest free funds in form of share capital and reserves & surplus to cover interest free advances considered by AO hence disallowance of interest exp nditure u/s 36(1)(iii) even on such ground is not justified. It is also observed that AO has made disallowance of interest expenditure which is in excess of interest debited in Profit & loss account and even claimed in return of income which is not permissible. Respectfully following the decisions of judicial authorities and decision of undersigned in preceding assessment year referred supra, I hereby delete the disallowance m de by Assessing Officer for Rs.6,77,67,630/-. It is also observed that appellant-has claim d interest expenditure of Rs.4,22,21,011/- in Profit & loss account but A.O. has made di allowance of interest expenditure for Rs.6,77,67,630/- which means that disallowance has exceeded interest expenditure claimed by appellant and such working of A.O, is factually incorrect. In nutshell, entire disallowance made by Assessing Officer u/s36(1)(iii) f the Act for Rs. 6,77,67,630/- is deleted. Thus, this ground of appeal is allowed.
Being aggrieved by the order of the ''Ld. CIT (A)'' the Revenue is in appeal before us.
5. Both the Ld. DR and Ld. AR before us relied on the order of the authorities below as favorable to them.
6. We have heard the rival contentions of both the parties and perused the relevant materials available on records. Admittedly, the amount of interest free advances stand at Rs. 56,47,30,250/- whereas the own funds of the assessee stands at Rs.1,15,36,49,790/- only. Undoubtedly, the own interest free funds of the assessee exceeds the amount of interest free advances as discussed above. Therefore, we are of the view that no disallowance of interest expenses onaccount
of diversion of the fund is warranted. In this regard, we find support and guidance from the judgement of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:-
“The principle therefore would be that if there are funds available bo h interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated o avai able with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the fi ding of fact both by the CIT(A) and Tribunal”.
6.1 Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:
“Where assessee's capital, prof t reserves, surplus and current account deposits were higher than the investm nt in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”
6.2 Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads a under :
If here are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.
In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of loans and advances as discussed above. Hence, we do not find any infirmity in the order of the ld. CITA. Hence the ground of appeal of the Revenue is dismissed.
7. The second issue raised by the Revenue is that the ''Ld.CIT (A)'' erred in deleting the addition made by the AO for Rs. 7,05,498/- by treating Information Technolgy Expenses as Capital Expenditure.